The aging 10-year bull market, which barely escaped plunging into a bear market decline in December, is on precarious footing even as it's been prolonged by a new, dovish Fed policy. "For now, the bull marches precariously on," says Goldman Sachs. "Tactically, we forecast S&P 500 returns will be modest in the near-term." Goldman highlighted a host of reasons why the forces that drove stocks in the past decade are unlikely to be repeated soon, and why the S&P 500 will struggle to rise in 2019, per the table below.
Source: Goldman Sachs US Weekly Kickstart
With the 10th anniversary of the current bull market upon us, Goldman cites its historically high returns, with a total gain of 401% (17.5% annualized), which ranks in the 94th percentile of 10-year annualized returns since 1880.
But as economic growth decelerates and upside becomes more limited, Goldman expects the stock market's momentum to slow significantly.
Apple Inc. (AAPL) is one stark example. Goldman says the company was a major driver of the S&P 500 and accounted for 20 percentage points of the index's total return over the past decade. But it's unlikely to be a key driver in the next decade. Its sales have stalled and the stock has gone sideways in the past month. The iPhone maker is one of 10 stocks that accounted for 25% of the S&P 500’s return over the past 10 years.
Stocks also face mounting pressures from wage inflation and other input costs that will pressure margins, making further expansion from the current record-high margins unlikely. Squeezed margins are one reason that valuations, which are dramatically higher than ten years ago, have limited upside. Goldman notes that the aggregate S&P 500 forward P/E multiple has expanded from 10x to 16x (+58%) this cycle.
Perhaps the most important destabilizing influence is earnings. Goldman says that earnings growth accounted for nearly 75% of the S&P 500's gains during the 10-year market expansion. But now, profit growth is evaporating and may even decline in some quarters in 2019, a number of market forecasters say.
All of this bodes poorly for stocks. "The positive impact on equity valuations from a patient Fed unlikely to tighten the funds rate for the rest of the year is offset by the negative impact of an anticipated recession in 1Q aggregate S&P 500 EPS,” wrote Goldman. All of these factors contribute to the firm’s target of 2,750 for the S&P 500 by mid-year, roughly unchanged from today.
To be sure, Goldman's forecast for the S&P 500 at 3,000 by year-end still implies a major 20.6% gain from the end of 2018, which is robust growth. But the market has shot up so far so fast ahead of fundamentals that it's now vulnerable to a pullback. Or in a best case scenario, it's set to post only modest gains for the rest of the year.